Unblended Fuel Will Be Taxed Extra From October; Here's Why

In a bid to reduce the share of unblended petrol in the country, Union Budget 2022 has proposed to levy an additional excise duty on unblended fuel.

"Blending of fuel is a priority of this government. To encourage the efforts for blending of fuel, unblended fuel shall attract an additional differential excise duty of Rs 2/litre from the 1st day of October 2022," Finance Minister Nirmala Sitharaman said in her Budget speech.

This step has been announced to ensure strict adherence to fuel blending norms which will further help reduce the emission of harmful particles. This intervention will also help bring down import dependence for energy requirements and give boost to agriculture sector.

Current policy regime

The National Policy on Biofuels - 2018, provided an indicative target of 20 per cent ethanol blending under the Ethanol Blended Petrol (EBP) Programme by 2030.

Currently petrol with 10 per cent ethanol blend (E10) is being retailed by various Oil Marketing Companies (OMCs) in India, wherever it is available. This programme has been extended to whole of India except Union Territories of Andaman Nicobar and Lakshadweep islands with effect from 1 April 2019 to promote the use of alternative and environment friendly fuels.

However, as sufficient quantity of ethanol is not available, therefore, only around 50 per cent of petrol sold is E10 blended, while remaining is unblended petrol (E0). Parts of the country located far away from the ethanol production or storage facilities have a lower blending ratio.

The current level of average ethanol blending in the country has jumped to 8.5 per cent in the Ethanol Supply Year (ESY) 2020-21 from an average ethanol blending of 5 per cent in the last two years.

Due to several interventions in the supply side of ethanol, the Ministry of Petroleum aims to achieve 10 per cent ethanol blending levels by the end of ensuing ESY 2021-22 and 20 per cent target by 2025.

E20 target

The government has advanced the target of achieving 20 per cent ethanol blending in petrol (called E20 fuel) from 2030 to 2025 under EBP (ethanol blending policy). This was announced by Prime Minister Narendra Modi on 5 June 2021 i.e. on World Environment Day while releasing the Report of Expert Committee on “Roadmap for ethanol blending in India 2020-25”.

The ambitious target is a key element of the economy-wide energy transformation.

What is Ethanol?

Ethanol is a clear, colourless organic liquid, also known as ethyl alcohol, grain alcohol, and EtOH. It has medical applications as an antiseptic and disinfectant. It is used as a chemical solvent and in the synthesis of organic compounds, apart from being an alternative fuel source.

Ethanol can be produced from the fermentation of various plant materials collectively known as "biomass" or via petrochemical processes such as ethylene hydration.

Ethanol produced from biomass is also called as Bioethanol and is one of the principal biofuel. It can be produced from starch- or sugar-based feedstocks, such as corn grain (as it primarily is in USA), sugarcane (as it primarily is in Brazil), or from cellulosic feedstocks (such as wood chips or crop residues).

Global transportation sector is facing three major challenges, namely depletion of fossil fuels, volatility in crude oil prices and stringent environmental regulations. Use of alternative fuels specific to geographies can address these issues. In Indian context, alternative fuel is not only a national imperative, but also an important strategic requirement.

India is the world’s third largest energy consuming nation and a significant part of India’s energy requirement is met through crude oil imports. According to Petroleum Planning and Analysis Cell (PPAC), India’s net import of petroleum was close to 185 million tonnes (Mt) at a cost of US $551 billion in 2020-21. Most of the petroleum products are used in transportation.

India’s share in global energy consumption is set to double by 2050. A rising energy demand and high reliance on import poses significant energy security challenges. It also leads to massive foreign currency outflow. Further, excessive use of fossil fuels leads to higher carbon emissions and associated health concerns.

Achieving energy security and transitioning to a thriving low carbon economy is critical for a growing nation like India. A successful 20 per cent ethanol blending program has potential to save the country US $4 billion per annum, i.e. Rs 30,000 crore.

Why Ethanol is gaining traction as an alternative fuel?

Ethanol is considered to be one of most suitable alternative blending, transportation fuel due to its better fuel quality and environmental benefits.

Ethanol is a less polluting fuel, and offers equivalent efficiency at lower cost than petrol. As the ethanol molecule contains oxygen, it allows the engine to more completely combust the fuel, resulting in fewer emissions and thereby reducing environmental pollution.

Availability of large arable land, rising production of foodgrains and sugarcane leading to surpluses, availability of technology to produce ethanol from plant based sources, and feasibility of making vehicles compliant to ethanol blended fuel makes it a lucrative proposition.

What is Ethanol blending?

Pure ethanol - 100 per cent ethanol or E100 – could theoretically be used to power vehicles, but generally isn’t, due to technical challenges and lack of financial viability.

Ethanol thus is mixed with gasoline to form different blends. The commonly used blends are E5 (5 per cent ethanol, 95 per cent gasoline) E10 (10 per cent ethanol, 90 per cent gasoline), or E85 (85 per cent ethanol by volume and known as flex fuel).

Improving Vehicular Efficiency

Ethanol has a higher octane number than gasoline which offers significant advantage in the form of increase in Research Octane Number (RON) of the blend. Minimum octane number requirements for gasoline prevent engine knocking and ensure drivability.

With fuel embedded oxygen and higher flame speed, ethanol helps in complete combustion and reduce vehicular emissions.

Vehicular emissions such as Carbon Monoxide (CO), Hydrocarbons (HC) and Oxides of Nitrogen (NO_x) are currently regulated in India. Use of ethanol blended gasoline decreases these emissions. A summary of emission benefits with E10 and E20 fuels compared to neat gasoline is presented below.

The calorific value of ethanol is around 2/3rd of gasoline. This indicates that the increase in ethanol content will decrease the heating value of the ethanol-gasoline blend. Hence, more fuel is required to achieve the same engine power output.

However, ethanol has a higher octane number and thus the engine can be operated with a high compression ratio without knocking. This increases the efficiency of the engine considerably. This combined with optimal spark timing negates the fuel economy debit due to low calorific value of ethanol. Hence, ethanol is considered as an efficient fuel provided suitable modifications are made in the vehicle.

Currently, the ethanol economy in India is pegged at Rs 20,000 crore, which is being targeted to reach over 2 lakh crore. India wants to follow in the footsteps of countries like Brazil that have been using ethanol in their transport industry for more than 60 years and have a compulsory blend of 27 per cent ethanol in petrol.

The ethanol supply under the EBP program, which was only 38 crore liters in Ethanol Supply Year (ESY) 2013-14, has increased to 173.3 crore liters during ESY 2019-20 and is expected to be more than 302 crore liters by the end of ESY 2020-21 to achieve approximately 8.1 per cent blending, the Economic Survey 2021-22 noted. This is an increase of 74.5 per cent compared with the previous year.

According to Indian Sugar Mills Association (ISMA), 10.5 billion litres of ethanol will be required to achieve 20 per cent blending targets by 2025. Out of the total requirement, 6-6.5 billion litres are expected to come from sugarcane and molasses while 4-4.5 billion litres from grain and corn.

Under the EBP programme, the government aims to ramp up the production of ethanol, including through opening of ‘alternate’ route for ethanol production, reduction in GST on ethanol from 18 per cent to 5 per cent and via the interest subvention scheme.

With a view to achieve the target of 10 per cent ethanol blending in petrol by the end of ensuing ESY 2021-22 and 20 per cent by ESY 2025-26, government has allowed production of ethanol from different feed stocks viz B-Hy and C-Hy molasses, cane juice, sugar syrup, sugar and damaged food grains including surplus FCI rice, maize, etc. by the distilleries either attached with sugar mills or standalone.

Challenges for Automobile Manufacturers

Achieving E20 targets will require emission norms for nationwide standardisation and adoption.

To decarbonise the transport sector, the Ministry of Road Transport and Highways (MoRT&H) has notified mass emission standards to introduce alternate fuels viz. blends of ethanol with gasoline (E-10, E-12, E-15, and E-20), flex-fuel (E 85) or (E 100) and Ethanol blend for diesel vehicles (ED 95).

On the material compatibility front, the rubber and plastic components are compatible with E10. However, with the proposed target of E20, the vehicles are now required to become both materials compatible and tuned for use of E20 fuel.

Road Ahead

Considerable benefits can accrue to the country by ethanol blending, such as saving US $4 billion foreign exchange per year in imports, enhancing energy security, lowering carbon emissions, improving air quality, promoting productive use of damaged food grains and waste, increasing farmers’ incomes, creating employment and investment opportunities.

The government is expecting an investment of up to USD 5,541 million to help India achieve its ethanol blending target of 10 per cent by 2022 and 20 per cent by 2025, the Economic Survey 2021-22 noted.

A significant part is that the production of ethanol in the country for blending purposes will provide farmers with a much better price for their sugar and grain produce.

Due to the high production and availability of large stockpiles, the prices of these two commodities were falling. The farmers will get a much-needed relief by diverting the two commodities towards ethanol production. This will transform our “annadaatas into urjadaatas”.